Question

Allied Biscuit Co. is expected to generate a free cash flow (FCF) of $9,760.00 million this year (FCF! = $9,760.00 million), and the FCF is expected to grow at a rate of 21.40% over the following two years (FCF2 and FCF). After the third year, however, the FCF is expected to grow at a constant rate of 2.82% per year, which will last forever (FCF4). If Allied Biscuit Co.'s weighted average cost of capital (WACC) is 8.46%, what is the current total firm value of Allied Biscuit Co.?

a. $235,875.90 million
b. $292,577.13 million
c. $283,051.08 million
d. $30,345.04 million

Answer 1

Consider the following calculations

Step-by-step explanation:

FCF1 = 9,760

FCF2 = 9,760 (1 + 21.4%) = 11,848.64

FCF3 = 11,848.64 (1 + 21.4%) = 14,384.24896

FCF4 = 14,384.24896 (1 + 2.82%) = 14,789.88478

Value at year 3 = FCF4 / required rate - growth rate

Value at year 3 = 14,789.88478 / 0.0846 - 0.0282

Value at year 3 = 14,789.88478 / 0.0564

Value at year 3 = 262,231.9996

Current total firm value = Present value of cash inflows

Current total firm value = 9,760 / (1 + 0.0846)1 + 11,848.64 / (1 + 0.0846)2 + 14,384.24896 / (1 + 0.0846)3 + 262,231.9996 / (1 + 0.0846)3

Current total firm value = 8,998.709202 + 10,072.31511 + 11,274.00935 + 205,531.7875

Current total firm value = $235,875.90 million